Plot thickens in publishing partnership

Digitisation ... the internet age has changed the landscape of published material and how it is sourced. Photo: Supplied.

When Penguin and Random House unveiled, in a hurricane-battered New York, plans to merge their operations, one wag remarked that they had created a perfect storm of their own - for the publishing industry.

The proposal, whereby Bertelsmann, the German company that owns Random, would hold 53 per cent and Penguin proprietor Pearson, the world's largest publisher, the remaining 47 per cent, will create an English-language publishing giant that could hold up to a 30 per cent share in some markets.

The new business will, says Forbes magazine, have revenues of about $US4 billion ($3.83 billion)and employ about 9000 people in 20 countries. The significance to the future of the global book industry prompted Rupert Murdoch's News Corp, which owns HarperCollins, to make a last-minute, outright offer for Penguin, which was rejected.

Like the music and newspaper industries, book publishing is having to reinvent itself in the face of the threat posed by digitisation. Consumers are rapidly changing their buying habits and publishers and traditional bookshops are feeling the strain. Online retailers such as Amazon have huge influence and are expanding their spheres of influence from only selling and into publishing itself. The whole publisher-author-reader nexus is changing.

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The move is seen as a necessary bulking up in the face of the increasingly strong online retailers and the parlous, rapidly changing state of the industry.

John Makinson, the chairman and chief executive officer of Penguin, who will chair the new Penguin Random House, has been on something of a world tour since New York.

A publishing boss who also owns a small ''bricks-and-mortar'' bookshop in Britain, Makinson says digitisation alters questions of local distribution to a global scale.

''We concluded that this consolidation was going to happen, that it was right for it to happen, that we would be able to serve readers, authors, retailers better with the resources - not just financial resources but the creative resources, the technological resources, the brand resources - that an enlarged organisation would have.''

Makinson says the big issues facing publishing are to do with how content is distributed and the challenges facing physical bookstores. ''You've seen that already in this country through the collapse of REDgroup [which owned Angus & Robertson] and the impact this had on sales in the Australian market.'' The industry estimate is that 20 per cent of trade sales were lost.

The Book Industry Strategy Group says the value of physical and digital books sales in Australia in 2010 was $2.3 billion. After a plateau following the introduction of the GST in 2000, that value has increased on average at 4.1 per cent each year. It reckons that 66.3 million trade books were sold by Australian-based booksellers, increasing by 6.4 per cent between 2004 and 2010.

The group estimated that 27,500 people were employed in the Australian book industry in 2010. Of those 10,000 were involved in ''authoring and content creation'', 5000 in publishing and distribution, 2000 in printing and 8700 in retail.

What is clear is that sales of ebooks are increasing - Penguin reckons these grew 33 per cent in the first six months of this year and now comprise 19 per cent of its global revenues - putting increasing pressure on traditional bookshops.

Digital distribution has changed the publishing world irrevocably. ''If you can press a button and [a publication] can be available electronically, that has implications for the territorial-based publishing model and gives some advantage to the publisher that is globally present and can take a global view on the relationships with digital intermediaries, such as Google and Apple and Amazon and others; that can monitor copyright infringement and piracy on a global basis; that can develop a brand identity, whether it's Penguin or Random House, on a global basis; that can generate its own intellectual property for distribution around the world, and that can do its best to support physical retailers as well as online retailers in all the major markets.''

Makinson says the strength of Amazon as a retailer was one of the challenges ''but it was by no means the only and not the overwhelming issue either''. But other publishers are not sure. Hachette Australia's chief executive, Malcolm Edwards, says the merger is good for the industry because ''the balance has gone the wrong way in that we have an unbelievably dominant retailer, which is threatening the very fabric of creativity.

''If you believe in monopolies and totalitarian states, then you probably wouldn't think it was a bad idea, but I think when you've got in the US and UK [a situation where] Amazon would have something like 80 per cent of the ebook market, that can't be good. On a business level, a lack of competition is not in the consumer's interest.''

Edwards says if you have the emergence of large and dominant retailers on a global level, the natural business response is for suppliers to get bigger and merge. He is sure there are more mergers to come. Most industry observers expect Penguin Random House to make significant economies in ''back office'' operations such as distribution. Random and Penguin have strong, separate distribution businesses in Australia that look after their own product and that of other publishers. Makinson says at this stage, management is analysing the two companies to see where they overlap. ''We are asking ourselves … how many warehouses we are going to need in 20, 10 or five years' time in any case,'' Makinson says. ''This is now a conversation we will be having with our partners in Random House, but … it's not a new discussion.''

Text Publishing publisher Michael Heyward says the issue for all big companies that both publish and distribute is how they deal with the certainty that they're going to have fewer books in their warehouses than they did five years ago.

And what about the editorial side of the business? Penguin has only been in its spanking new Melbourne home for a few months; Random is well established in northern Sydney. There is some angst in Melbourne that the only multinational publisher could shift away. Makinson is adamant that won't happen.

But surely there will be economies in the operation? ''The editorial organisation - by editorial I mean marketing and publicity as well as editorial - that activity will be unaffected by this combination. So we will have the same number of titles, the same number of editors, the same number of imprints. Agents will pick up the phone or email exactly the same people they were emailing before this transaction happened.''

While he does see some areas that might make sense to do together, travel for example - ''not author-driven publishing categories'' - he wants there to be rigorous competition between the two editorial arms.

The Australian Publishers Association president, Louise Adler, says the merger is a matter of commercial interest for two big publishers. However, when Adler has her publisher's hat on - she is also the chief executive of Melbourne University Publishing - she worries the local industry is struggling.

''Sales are down and the gap between mass-market titles such as Fifty Shades of Grey or Bryce Courtenay and the rest is growing. The capacity to publish heartland Australian books is increasingly difficult. The space in which authors, readers and bookshops can flourish is narrowing. Those of us committed to new Australian writing will find the space is narrowing, but that's the state of the industry rather than anything to do with the merger.''

Text's Heyward does see opportunities. ''I think there is something in the ecology of book publishing which allows smaller players to make a valid contribution and if you end up with a handful of really big companies, my prediction is that that will open the door for smaller companies to emerge.''